The Truth About Payday Loans [Alternatives & Why You Should Be Careful]
Out of cash? Hungry wallet? Empty bank account?
We’ve all been there. If you’re stuck in a financial rut and you’re looking for a way out, payday loans might seem like an attractive option.
But is it the best solution for your financial woes? Well, let’s see!
What Is a Payday Loan?
You can guess what “payday” loans are from the name itself: it’s a short-term loan that you’ll pay back on your payday. Simple as that.
Some people call these services payday advance.
For all the financial nerds out there, we’ll give you the technical definition from the Federal Deposit Insurance Corporation (FDIC):
Payday loans are loans with short terms to maturity, usually ranging from 14 to 45 days, intended to carry a borrower through a temporary cash deficiency.
So these three basic facts will tell you that what you’re getting is a payday loan:
- A short maturity term set at a future date (usually on your next payday);
- A small loan amount (usually just hundreds of dollars); and
- High-interest rates.
An Example of a Payday Loan
Here’s an example of how a payday loan works:
You have hospital bills, utility bills, and a car plan to pay for. Your income can ONLY fit your hospital bills, your utility bills, and your groceries.
The problem is, you have a horrible credit score, so loaning money or taking out a personal loan from the bank isn’t an option for you. You won’t get approval!
What can you do?
One option is to apply for a payday loan. With a payday loan, you promise to pay a lender the amount you loaned, plus interest fees, on your next paycheck.
Why Do People Like Payday Loans?
People like payday loans because:
- You don’t need a high credit score to get approved;
- There aren’t a lot of requirements to get approved; and
- You can quickly cash out your loan proceeds.
Payday lenders won’t mind lending you the money even with a bad credit score because besides promising them you’ll pay back by payday, they have other ways to protect themselves.
Some of these include authorization for electronic withdrawal or a hard credit check to ensure that your payday lender gets paid, even if the money doesn’t come from your hands.
How Do I Apply For Payday Loans?
Interested in getting a payday loan? Signing up for these loans doesn’t require a lot of paperwork. You’ll only have to submit the following to apply for these loans:
- Proof of Employment
- Your salary/wage stub
- Your bank statement or account information
When Do I Get the Loan Amounts?
Payday loans usually get deposited into your account as soon as you’re approved so you can get instant access to the proceeds.
That’s why these short-term loans are so popular for borrowers with credit difficulties.
How Can I Repay the Loan?
To repay the loan, you have to contact your payday lender by maturity date or due date and pay back the amount you paid.
The maturity or due date for these loans is when you get your paycheck or your next payday (hence the name). For most of us, that’s biweekly.
What Happens If I Can’t Pay Back?
Remember when you signed up for a payday loan?
The bank or financial institution will usually require you to submit either:
- An authorization allowing them to withdraw funds from your bank account by the time your loan due date hits, or
- A hard credit check or a postdated check.
With either of these, lenders can cash out from your bank account or check in case you forget, or you cannot repay your creditor.
That’s your lender’s security for agreeing to lend to a borrower with a bad credit score.
And in case your bank or check bounces are not funded, creditors can’t run after you and throw you in jail.
You can’t get imprisoned for not paying your debts, and there haven’t been debtors’ prisons in a long time. At most, your lender will sue you in civil courts.
Why Should You Stay Careful When Applying for Payday Loan Services?
If it sounds too good to be true, it is. Payday loans can be DANGEROUS, and some even call them predatory because some lenders might take advantage of people with bad credit scores.
Maybe you can get a couple of dollars for this month, but what happens next month? You’ll repay your debt, add on high-interest rates, and lots of other hidden fees.
How Much Do Payday Loans REALLY Cost?
Your lender can charge you anywhere from $10 to $30 per $100 that you borrow. So for a 500 dollar debt, you might end up coughing out $150 on top of your debt, plus other fees.
How’s that compared to other forms of credit?
- If your payday is every two weeks, that adds up to an annual percentage rate (APR) of nearly 400 percent!
- Some pay-day lenders even charge interest as high as 780% APR. You won’t hear THOSE rates from regular banks!
Compare that with credit cards. A credit card usually has an APR of just 12 to 30 percent. That’s MUCH LOWER than your payday loan interest.
Heck, even a cash advance from your credit card has lower interest than a payday loan!
Your Fees Will Start Adding Up
If you spend your next paycheck on all your bills and leave just enough income to repay your principal amount, you might not be able to pay off the extra high-interest rate.
Then you’ll end up in a vicious cycle of loan rollovers.
So here’s what you’ll risk when you avail of these high-interest loans:
- High APR/effective APR
- The vicious cycle of rolling over loans – fees add up
- Credit score may drop if you don’t pay.
If you need cash quickly and you don’t have good credit, what can you do?
If you’re sure you can afford the costs of borrowing money from a payday lender, no one’s stopping you! It’s a good way to get money on short notice.
As long as you’re sure you can repay the loan on top of all your bills, then you’re a suitable candidate for a payday loan.
But if you’re stuck in a financial gutter and you’re having a hard time getting out of it, try credit counseling to see which credit services you can use to tide you over.
But here are some suggestions in case you don’t think payday loans are for you:
If you need money quickly but don’t have enough income to support exorbitant interest, you can give title loans a shot.
A title loan is a short-term borrowing for a modest amount, with your vehicle as security.
A title loan has these ADVANTAGES over a payday loan:
- Lower %APB;
- You can borrow more money (usually more than $1,000, or half your vehicle’s price) than in a payday loan (lenders only let you borrow a few hundred dollars);
- As easy to process as a payday loan;
- Available to borrowers with modest credit scores.
For example, a title loan is perfect for anyone trying to start a small business. A payday loan won’t be enough to answer for the things you’ll need to get started.
Payday Alternative Loan
If you’re a federal credit union member, they can help you get a payday alternative loan for your personal financial needs.
Your payments will have LESS INTEREST than a payday loan service, and you have a longer repayment period as well.
If you have access to a credit union, you can take out a personal loan from that union to add on.
Credit Card Cash Advances
We know what you’re thinking: NO WAY! But if you already have a card anyway, you might as well take advantage of the cash advance facility.
Sure, it has higher interest rates than your usual monthly bill, but at least it’s lower than what you’ll get from payday lenders!
Emergency Credit Services
If you need to make plenty of payments for different essential services, check out your local community service agency for rent, utilities, and the cost of back-to-school expenses.
You can also try the following:
- Going to food banks to offset grocery bills
- Applying LIHEAP for your electricity bills.
How Can I Protect Myself From Vicious, Predatory Payday Lenders?
Protection for Military Service
If you’re a military service member, the Federal Military Lending Act (MLA) allows active duty service members, as well as their dependence, to cap your loans to 36% of the Military Annual Percentage Rate (MAPR).
12 states already ban payday lending, including:
- New Jersey
- New York
- North Carolina
- New Mexico
- Vermont and
- West Virginia
If you live in any of these states, you can’t get payday loans.
While payday loans are legal in other states, they limit predatory lending practices. State laws limit:
- The amount you can borrow; and
- The maximum amount of interest that a payday lending business can impose on you.
Most of the time, the State’s got your back. And if they don’t, you can always send a complaint to the Consumer Financial Protection Bureau.
Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau is a U.S. government agency that helps borrowers repay the loan.
It also protects other customers of financial instruments from being abused by payday lenders.
If you need to repay a loan, or if you want to complain about your lender, you can always submit a complaint, and they usually respond within 15 days.
If you need to go holiday shopping, start a business, or pay the bills, a payday loan might be what you need for that extra push.
But if you’re not careful, you can fall into a trap. So exercise caution, and borrow wisely!